Compliance Blog

A couple of weeks ago, we wrote about Regulation Z’s rule that details the requirements for over-the-limit transactions on a credit card and the opt-in process that must be completed before charging members when they exceed their credit limit on a credit card account. In response to the blog, credit unions have asked whether an over the limit fee must be included in NCUA’s 18% interest rate calculation. Today’s blog focuses on what credit card costs and fees a federal credit union can charge without including them in the calculation for NCUA’s interest rate cap.

Section 701.21(c)(7)(i) governs the usury interest rate ceiling federal credit unions are required to follow. Under this rule, federal credit unions are not allowed to extend credit to members at rates exceeding 18 percent per year on the unpaid balance inclusive of all finance charges. Neither the Federal Credit Union Act nor NCUA regulations specify how the rate of interest is to be calculated. The regulation merely states that it must be “inclusive of all finance charges.” NCUA’s practice has been to follow the definition of “finance charge” found in section 1026.4(a) of Regulation Z:

“The finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction.”

Calculating the interest rate cap on open-end credit can be challenging because it is not a static calculation. Interest and fees for credit cards can change depending on how consumers use their accounts. Federal credit unions are required to combine all finance charges, but also all rates and applicable fees to ensure the effective rate charged is not in excess of 18 percent over the term of the loan. So, what must be included in this calculation? In other words, what types of fees and charges qualify as finance charges and therefore would affect the interest rate calculation? Let’s see…

Charges and Fees That are not Finance Charges

According to section 1026.4(c), the definition of finance charge in Regulation Z does not include application fees if charged to all applicants for credit (i.e. a $25 dollars fee all borrowers must pay when applying for a loan at the credit union), regardless of whether credit is actually extended. The definition also excludes charges for actual unanticipated late payment, exceeding the credit limit, delinquency, default, or a similar occurrence. Another exclusion applies to charges for paying items that overdraw an account, unless the consumer agreed to the imposition and payment of the charge in writing beforehand, and other for participation in a credit plan (i.e. an annual fee for having a line of credit available; it is often charged regardless of whether a consumer uses the line).

Charges and Fees That are Finance Charges

NCUA addressed interest rate limits and transaction fees on credit card cash advances in a 2001 Legal Opinion Letter. The agency determined a cash advance fee is a finance charge under Regulation Z:

“A transaction fee is a finance charge that must be included when calculating the rate of interest charged the member. Therefore, an FCU is prohibited from charging such transaction fees if they would cause it to exceed the regulatory interest rate limits.

[…]

We have concluded that a transaction fee charged a member at the time of a credit card cash advance must be included in the rate of interest calculation because it is a finance charge. FCUs may only charge such transaction fees if added together with the other fees and interest they would not result in an interest rate in excess of the regulatory limit.” (Emphasis added). See, NCUA Legal Opinion Letter 00-1217 (January 25, 2001).

This aligns with comment 4 to section 1024.4(a) which indicates “any transaction charge imposed on a cardholder by a card issuer is a finance charge, regardless of whether the issuer imposes the same, greater, or lesser charge on withdrawals of funds from an asset account such as a checking or savings account.” The commentary illustrates the application of the rule with the following example:

“Any charge imposed on a credit cardholder by a card issuer for the use of an automated teller machine (ATM) to obtain a cash advance (whether in a proprietary, shared, interchange, or other system) is a finance charge regardless of whether the card issuer imposes a charge on its debit cardholders for using the ATM to withdraw cash from a consumer asset account, such as a checking or savings account.” (Emphasis added.)

Similarly, the commentary includes a discussion on foreign transaction fees and whether they are considered finance charges. According to comment 4 to section 1026.4(a)(3), “any charge imposed on a credit cardholder for making a purchase or obtaining a cash advance outside the United States, with a foreign merchant, or in a foreign currency is a finance charge, regardless of whether a charge is imposed on debit cardholders for such transactions.” Therefore, in most cases foreign transaction fees must be included in the interest rate calculation. 

Credit unions may find as a helpful reference this article from the Philadelphia Fed’s Consumer Compliance Outlook. While the article focuses on closed-end credit, it still can be a useful tool as it does a good job tracking the various exceptions to the definition of a finance charge under Regulation Z.